THE NATURE AND SIGNIFICANCE OF CONSUMER THEORY IN MODERN ECONOMICS: THE CASE OF MODERN CHINA

Author: Wainyaragania Kennedy Arthur

ABSTRACT

This paper examines the consumer theory both in a traditional setting – in which utility of the consumer is derived from the good itself, and in a new/modern setting – in which utility of the consumer is derived from the characteristics that the good possess. The paper is twofold – the first seeks to arrive at a precise concept about consumer theory and the nature of the generalizations of which it consists. The paper reviews the traditional consumer theory in terms of its weaknesses in modern economics, and discusses the new approach to consumer theory. The methodology used in analysis involved specification of the demand equations; specification of the utility functions; and application of goods differential approach. The application of goods differential approach was used to review the nature and significance of consumer theory in modern economics. The results of the review and analysis showed that characteristics of goods are the main and reasonable factor to utility, to determining the behaviour of the consumer towards decision making in choosing between goods. The traditional approach to consumer theory treats goods as giving direct utility instead of supposing that it is the properties/characteristics that goods possess that give direct utility. Therefore, it can be concluded that the good’s characteristic is an important determinant in explaining consumer behaviour.

Keywords: Consumer theory, Modern economics, Utility, Consumer

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